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Voices Why don't all states recognize 1031 exchanges?

Each state in our union handles state taxation of 1031 exchanges differently, as each state has its own requirements pertaining to state tax withholding, clawback rules, filing deadlines and other aspects of an exchange.

Sometimes, as in the case of California regarding clawback provisions, certain states stand out for their treatment of a particular issue. Whenever a state handles a particular issue in a unique way, this should always be noted carefully by 1031 professionals, because the way in which an issue is handled by one state can quickly become adopted by other states across the nation. California, for instance, has always been seen as a sociopolitical trend-setter, so its treatment of 1031 exchanges at the state level should catch the eye of qualified intermediaries, 1031 attorneys and other professionals involved in the 1031 industry.

Pennsylvania has long been seen as something of an oddity given its pronounced reluctance to recognize 1031 exchanges. If a taxpayer conducts a 1031 exchange involving the sale of a Pennsylvania state property, that taxpayer will incur a tax liability to the state of Pennsylvania, regardless of whether the taxpayer acquires either a Pennsylvanian or non-Pennsylvanian property. In this article, we’ll look at the specifics of Pennsylvania state taxation as it applies to real estate; explore the reasons underlying Pennsylvania’s position toward exchanges; and hypothesize whether we can expect other states to follow Pennsylvania’s example.